The Analyst: Bullish Mott's record bodes well for PSigma

 

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The Independent Online

Investors who bought PSigma Income at launch in April 2007 might ask why I am featuring this fund again, considering it has never risen above its original offer price. It's a fair question and one which I am happy to answer.

High-yield equities have been out of favour for the past five or six years, so fund manager Bill Mott has been swimming against the tide. To be fair, his original decision to invest in the banks was wrong, a point he would acknowledge. Yet I simply cannot write off Mr Mott's excellent long-term track record. Frustratingly, since the launch of the fund, his macro-economic view has been almost completely correct. He was among the first to call a significant drop in interest rates and also predicted a long, grinding recovery from the financial crisis.

I found Mr Mott supremely confident on the outlook for his fund when I met him recently. He considers the chance of policy errors from politicians and central bankers to be higher than at any point during his career. He also noted that despite the financial crisis there has been no rebalancing of the global economy. He puts the chance of the UK suffering a prolonged period of subnormal growth, by which he means at least five or possibly 10 years, at 60 per cent. This environment could be good for high-yielding equities. A low interest-rate environment favours companies which can continue to pay and increase their dividends. In his portfolio these are represented by companies such as Vodafone, GlaxoSmithKline and Shell. Each accounts for around 6 per cent of the fund and they currently offer 2 times the yield available on government bonds; surely indicative of some value. Furthermore, a 40 per cent re-rating would still not leave them looking particularly expensive.

There is always the risk of a "black-swan event" – a significant occurrence that is virtually impossible to predict. A deflationary spiral, similar to that in Japan, would be an example. Even this wouldn't necessarily be that bad for high-yield equities, providing the companies held have pricing power. Mr Mott also sees a 20 per cent chance of inflation being pushed higher by the actions of central banks. Again, this is mainly a threat for businesses which can't pass cost increases on to the consumer.

Overall, Mr Mott's views chime with those of equity-income peer Neil Woodford. He remains positive on pharmaceuticals, both in the UK and oversees, diversifying into companies such as Novartis, Roche, Bristol-Myers Squibb and Johnson & Johnson. He believes global pharmaceuticals are as under-priced as tobacco companies were 10 years ago. They are pricing in no biological innovation in our lifetimes, only technological advancements. His conviction is backed with an 18 per cent position in this sector.

I have seen some of the worst stock-market volatility of my life in the last few weeks. Daily swings of 1 per cent or 2 per cent have not been uncommon. Some certainty and predictability would be welcomed by most investors, but the dark cloud of eurozone sovereign debt remains. Investment is being turned on its head – government bonds, traditionally a benchmark for the risk-free rate of return, barely yield 2 per cent while GlaxoSmithKline type stocks offer a huge yield premium.

I still believe the eurozone crisis will come to a head quite soon, as I wrote last week. Any substantial fall in the market would make this fund one of my first choices.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent

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